Count Nomura’s Charlie McElligott in the camp who thinks the latest PMI data out of China is evidence that the recent rebound in the world’s second-largest economy probably isn’t sustainable.
On Tuesday, both the official and Caixin manufacturing prints missed for April, and the non-manufacturing and composite numbers fell short of estimates as well. To be sure, the data wasn’t terrible, but it does suggest that some of the blockbuster-type beats we’ve seen out of Beijing over the past month might have been distorted.
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Closely Watched PMI Data Out Of China Misses, Suggesting Recovery Still Fragile
“[This] acts to confirm [our] cautious view on the Chinese recovery, and that the perception of March’s rebound is / was unsustainable, driven by the stimulus / credit impulse, the moving LNY holiday and the front-loading due to the VAT cut”, McElligott writes on Tuesday, adding that from a thematic trade perspective, “the incremental data softening simply justifies that from a policy perspective–and despite recent post-Politburo ‘less dovish’ language–the PBoC will be forced to remain on the ‘dovish offensive’ with regard to monetary easing.”
That, one hopes, will keep the “cyclical reflation” story in play. This is more than a little ironic – we now need softer data to maintain a narrative about better growth expectations, because the latter depends almost entirely on more stimulus.
Charlie goes on to reiterate many of the points about the Fed he made on Monday, before suggesting that the last couple of days have felt to him like “grabby” buyside behavior motivated by FOMO.
“The late-day price action in US Equities over the Friday session and into Monday’s AM session–as an extrapolation of some recently ‘grabby’ / ‘FOMO-y’ client trading behavior–felt like there was a buy-side source of ‘Short Gamma’, as evidenced by the ‘TWAP-type buying’ of SPX weekly calls”, he writes.
Finally, McElligott encourages you to exercise a bit of caution when it comes to headlines about record short VIX positions by hedge funds – I assume you’ve seen those stories by now (see here, for example).
“Separately on VIX, I want to clarify: do NOT buy into the ridiculous ‘Hedge Funds Shortest VIX Ever’ as some sort of lame / generic ‘complacency’ indicator or contrarian ‘sell signal'”, Charlie chides, adding the following color:
The trick is this: yes, the net speculative CFTC VIX position is “shortest ever” (-$177.8mm Vega); HOWEVER, this notional “Short Vol” position is FAR SURPASSED by the net notional “Vega LONG” in the VIX ETN complex (+$247mm Vega).
Two points:
The Chinese do not have to dump treasuries. They can merely boycott the increasingly huge UST auctions. How will Trump respond? MMT, here we come!
Rare earth materials. I keep reading that supply will appear elsewhere. Uh, have any of the geniuses pushing that narrative ever examined how long it takes to bring a mine on line? Especially for very toxic minerals. Then there’s the needed refineries. We are not talking weeks or months. Look back at 2011 for a primer. Those commentators should be embarrassed.